Investing Ideas Newsletter

Short: EXAS, BGFV, INVH, HZO, MPW, CAR, TXG, PEB, TSLA, RVLV, BBY, AAP Long: PLBY

Below are updates on our thirteen current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker. 

EXAS

Short Thesis Overview: Exact Sciences (EXAS) shares remain on the Health Care team’s Best Ideas Short list following its  4Q21 / FY21 earnings release and call. We think concern around 2022 Cologuard screening revenue guidance ($1,340MM to $1,347MM up from $1,062MM in 2021) is likely to leave the stock in a short bucket in our MicroQuads (MicroQuad 4 or 1), which is not a great place to be for a stock when we’re in Macro Quad 4.

COVID-19 testing has fallen off a cliff.  There has been concerns in the media that a return to in person school and in person work after Labor Day would cause a new wave of COVID cases, and with it a new wave of COVID testing. 

EXAS has all but eliminated COVID testing revenue from the guidance. So far in September, COVID cases are declining and showing no signs of a resurgence.

BGFV

Short Thesis Overview: Earnings risk is huge in 2022 and beyond for BGFV.  Nike is gone and the sporting goods category has seen over consumption during the pandemic which should mean an impending drop off in demand.  Double whammy of earnings pressure on BGFV

This week JD Sports (which bought Finish Line in the US) reported a beat for the quarter and held guidance but should have guided down. The market is expecting a miss considering the macro environment.

After back to school trends were positive overall, in the last couple of weeks visit trends sporting goods stores have been declining (see chart below). As industry trends slow, the bigger players will get more competitive to drive sales, that applies more margin an share pressure on BGFV, which is already ceding big chanks of share with weakening profitability. We wouldn’t be surprised if the company is gone within a few years. 

INVH

Short Thesis Overview:  We added Invitation Homes (INVH) to the Best Idea Short list, as we think the recently revealed whistleblower case in San Diego is a much bigger deal potentially than the market is currently discounting. This will be a controversial one for sure as INVH is a consensus long trade (and we recently had on the long bench), but we think (1) all the more reason to short it here given both the headline and real financial overhang mixed with a Quad 4 macro setup, and (2) clients need to be thinking about this issue critically.

The fundamental bull case  for INVH continues to weaken: we think property tax expense growth could be +7.5% to +8.5% next year which is well-above what the Street is assuming, and that increased supply via conversion of units from build-to-own to build-to-rent will create a more “elastic” market with lower top-line growth. Translation: both growth and margins have already peaked.

HZO

Short Thesis Overview: This is definitely a play on ‘shorting the rich’. MarineMax is a retailer of new and used boats as well as aftermarket parts, maintenance, storage, financing and some other small business pieces. The pricing and mix is heavily weighted to the higher end/luxury consumer buying the mega-yachts such as Azimut rather than the average consumer buying a Boston Whaler or a new Mastercraft wakeboarding boat. Consensus has straightlined the new peak 32% margin into perpetuity and is modeling that $7 in EPS power holds steady over a TAIL duration. This company has reversion risk all through the P&L from peak revenue growth to peak margins to peak earnings power. A consumer facing high macro level spending headwinds along with a normalization of the inventory position and a mix reset back to normal selling will likely see gross and operating margins fall back to historical levels and presents ~40% downside in the stock – entirely from a massive negative earnings revision.

This was an ugly market weak, that means HZO made new lows, but it also means that the VIX spiked above 30.  Markets are back in high volatility mode which means the forward outlook of demand from the negative wealth effect is in full swing. 

The core consumer for HZO is one that is highly sensitive to the wealth effect.  HZO is overearning and we are headed into a recession where demand and margins will revert to levels worse than 2019 while the street expect EPS more like the anomalous 2022 level.  

MPW

Short Thesis Overview: Medical Properties Trust (MPW) spent 30% of the conference call going down the road of non-credible 3rd party reports rather than presenting credible data; the data and the math is what will matter in the end; CEO said company is in the strongest position they’ve ever been in from a financial standpoint; red flags everywhere on the call, embarrassment for the management team; we encourage people to listen to the conference call; MPW remains a short.

In March 2012 it was reported that our favorite REITs short idea Medical Properties Trust (MPW) was building a new hangar at its hometown Birmingham-Shuttlesworth International Airport and leasing a corporate aircraft. MPW had just closed the Ernest deal and surpassed ~$2 billion of assets, and argued it needed to be “nimble” to source additional acquisitions.

Remember, all MPW does is collect rent checks. There is no operating business in the traditional sense. Interestingly, MPW noted it was also seeking hospital operating companies as targets, which obviously we have argued a triple-net REIT should not do.

Fast forward to today. MPW’s gross book value is over ~$20 billion, and each of the three primary corporate officers (CEO Ed Aldag, CFO Steve Hamner and COO Emmett McLean) have access to three corporate Gulfstream jets from the same hangar. Ed Aldag has used planes over 140 times to fly from Birmingham to Fairholpe, Alabama, where he owns a summer home on Mobile Bay.  

In January 2021 MPW financed the entire ~$1.4 billion acquisition of Priory Group by Waterland Private Equity Fund. It funded a ~$600 million sale-leaseback for the real estate plus an ~$800 million acquisition “bridge” loan, a portion of which was later converted into equity in Waterland. Perhaps more importantly, MPW struck a 25-year lease term with two 10-year tenant extension options.

MPW today aggressively books GAAP straight-line rent assuming the options are exercised, i.e. increases the amount of straight-line rent recognized in each quarter. Management cash bonuses are paid based on FFO performance, which receives the benefit of straight-line rent but bears no semblance to actual cash flow.

Meanwhile, CEO Ed Aldag has sold nearly 96% of his vested LTIP units over the last five years, and none of the Section 16 officers have executed any insider buys YTD despite the stock price drop.

On January 8, 2021 MPW made a ~$335 million loan to Steward Health’s CEO, Ralph de la Torre, and other management members, who used the proceeds to buy out prior owner Cerberus. Triple-net REITs should not lend to large tenants, and should NEVER lend to individuals.

Steward is by far MPW’s largest tenant at nearly ~30% of annual revenue. Not only did MPW fail to disclose that this loan was made until 4 months later along with 1Q21 earnings, but it waited until August 9, 2021 to alert investors that it was made to Steward’s management and not Steward the company.

In May 2021, just four months after the loan was funded, Ralph de la Torre purchased the 190-foot AMARAL yacht for ~$40 million. It doesn’t appear that he needed the capital from MPW.

CAR

Short Thesis Overview: There are many other considerations that could enter, but the factor that took adjusted EPS from ~$3.50 in 2019 to ~$33 over the last four quarters is used car price gains/reduced depreciation. Used car inflation soared well ahead of broader inflation but is now stalling/rolling-over in the past year. Electric Vehicles, if broadly adopted, would potentially bring much larger depreciation rates as solid-state batteries or other technologies evolve in coming years. CAR’s profits should fall with it as the rental fleet turns over.

Renting Cars Is A “Not Great” Business With Major Structural Deficiencies, Little Return Over Time: While a remnant of Cendant, it is worth recognizing that CAR shares provided a 2% annual total return over the 15 years prior to the pandemic start, roughly in line with inflation (no real return, S&P 500 was about 10% per year for the S&P 500). Hertz went bankrupt, albeit impacted by the pandemic.

Prior to the pandemic, investors were concerned about ridesharing and car sharing taking share from rental…because those alternative modes were.

The pandemic negatively impacted public transit, but ridership is likely to recover steadily as rider concerns fade. Alternative modes leave rental cars in a much structurally weaker position than their market shares would imply.

TXG

Short Thesis Overview: For TXG, our analysis of NIH grant awards, which tie to spending on their single cell sequencing equipment and consumables, continues to come in weaker than our bearish forecast.  Heading into 2H22 the headwinds get worse.  When they report 2Q22 we think they will temper their forecast for a steep recovery into year end which not only has consequences for 2H22 estimates, but more important in this Quad environment, 2023 EBITDA likely remains negative.

We used TXG as our idea for The Pitch earlier this week.  After updating the NIH tracking data, 2023 is shaping up worse than we expected.  The number of active research scientists appears likely to trend lower in 2023.  

With only 10% of grant activity occurring in the last 3 months of the year, its ulikely there will be enough new awards.  At 6X EV/Sales TXG looks cheap relative to the multiples in the 20s and 30s that TXG held at the peak.  But relative to declining sales and faster cash burn, it looks expensive and getting cut in half again is on the table.

PEB

Short Thesis Overview: There’s no denying, Pebblebrook Hotel Trust (PEB) sports a high quality management team that has a good track record at adding value and strategically allocating capital.  In a bull market with a RevPAR accelerating backdrop – PEB should be a name to gravitate towards. However, we don’t think those positives will matter in the context of PEB’s highly leveraged balance sheet, challenging exposures (heavy urban mix), extremely difficult resort property comps, and rather full valuation as compared to peer set + history.  We see regression towards the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM.

We’ve been keeping tabs on as many items we can with respect to corporate travel demand – office occupancy, weekday hotel occupancy, weekday hotel ADRs, forward ADRs, etc. – but tracking the most prolific of leading indicators seems to be flight bookings for corporate travels (shown below). 

In the last few weeks we have heard some positive anecdotes from companies but with a lack of true visibility (ex. RHP), it’s difficult to put too much stock in hotel REIT or C-Corp commentary around business transient expectations.  Updated data (through yesterday) out of the airline industry suggest there’s been very little change in the trajectory of the corporate segment.  Although bookings have ticked up from -28%, they’re still down -26% from their ’19 levels.  

We’d liken this kind of corporate demand to a more white-collar variety, a segment that the FS REITs and hotel brands really need to come through in 2H.  With tickets sold volume still hanging around the -25 to -30% mark and showing limited 2nd derivative improvement since early summer, we’re staying cautious on this demand segment and the related stocks.  We think there’s a good deal of risk not yet priced in the FS Hotel REITs – we like PK as our go-to shorts.

TSLA

Short Thesis Overview: Tesla (TSLA) headlines looked better than people forecasted, but the internals are not that great; Big surge in inventory; Lower R&D and SG&A helped with earnings; Adding capacity to manufacture to produce cars that are 3-6 years old instead of investing in new capacity in an increasingly competitive market.

We highlighted recently that the EV tax credit modification essentially gutted credits for most OEMs by limiting battery mineral sourcing and production locations, as well as introducing income and MSRP caps.  We’re hearing that this modification may run into problems with the Byrd rule, essentially removing the provision unless the Senate gets 60 votes to keep it (basically takes it out of reconciliation). 

We expect that there is heavy lobbying against this provision from every OEM whose credits had not already expired (only helps TSLA and GM).  Our best guess is that this provision comes out of the bill or is modified in some way that makes it less onerous.  Manchin is no fan of the EV tax credit, and Democrats may be better served by leaving it alone.

RVLV

Short Thesis Overview: RVLV has a problem with rising returns and rapidly building inventories.  On inventories, management struggled to characterize it’s problem.  The balance is up 76% YY and the company admitted it has too much, but it also noted it has high quality inventory, and that it will retain its value, but because of softening demand, and the desire to reduce that inventory, there will be some measured promotions.  Maybe this is possible in a normal environment, but EVERY APPAREL COMPANY HAS TOO MUCH INVENTORY.  Good luck moving inventory in a measured fashion when every company is trying to clear product at the same time.

On top of inflation negatively impacting gross margins, RVLV gross margins will be hit by increased promotion levels. Just this week there was a 1-day 15% off the entire site promo, in addition to the never-ending sale that is running with an additional 20% off.

Now in 2H RVLV is extremely over assorted in its merchandise (nearly 50,000 products), while the effects of inflation are really hitting the P&L and balance sheet through high inventory levels and consumers slowing discretionary spending abilities. In order to move product, promo levels are going to be high – already nearly 50% of the merchandise on the website is discounted. RVLV can’t keep up the revenue growth it has had over the last few quarters; it wouldn’t surprise us if growth was negative in Q4.

In fact, management already acknowledged that Q4 is going to be their toughest comp. Its trading way too high at nearly 28x earnings, when it should be at 12x when estimates settle into a $1 earnings annuity outlook.

BBY 

Short Thesis Overview: We moved this higher a few weeks back when the stock rallied and we made our ‘short the rally’ in retail call.  The stock then was in the low $80s, but it’s corrected back close to $70.  Category demand is weak, inventories high, and we think the US consumer will continue to weaken as we face multiple Quad4s.  Still think you have downside here to around $55 to $60 on 2H revenue and margin risk, but the risk/reward after the drop suggests other shorts are higher conviction.

Over the last few weeks, we have seen continued declines in in-store traffic and Google interest at BBY. Even though the company guided down a few months ago, we don’t think it was enough.

As the recession becomes more evident to those who don’t see it yet, and the consumer is under increasing financial pressure, demand will continue to decline. The market is not seeing the large downside that is coming. As the consumer and business slows we see this headed lower and think the stock is worth more like $55-60 vs its current nearly $70 value.

AAP

Short Thesis Overview: "Our view of the TRADE and TREND durations in Auto Parts retail is getting incrementally bearish.  Long term demand drivers look intact, but near term we’re see deterioration in miles driven trends, elevated gas prices squeezing the car allocation of the consumer wallet, while general discretionary spending power of the consumer continues to be under pressure. "

AAP competitor AZO reported earnings this week. It had a headline beat, revenue accelerated in YY growth vs its fiscal 3Q, but the 2 and 3 year revenue growth trends showed big slowdowns. 

The company thinks weather has been a slight tailwind to the business, which makes sense after a “normal” (ie storm filled) winter and a summer seeing extreme heat in multiple parts of the country this summer.  That a risk for demand looking out 6 months or so if we have a milder winter, and cooler summer in 2023. Inflation drove 11% top line growth, with revenue up only 9% (ie units were down). 

Historically this is a category where inflation can be passed on in price without much impact on demand, but that is usually low to single digit inflation.  With an extend period of inflation in the double digits, we think unit demand will see real pressure, and consumer will need to trade down to cheaper, lower quality goods hurting industry sales growth.  

PLBY

Long Thesis Overview: One thing we see Playboy (PLBY) doing more now is its ability to tier product by price, channel (although PLBY leans into its own DTC channels), and consumer. The two products PLBY does this for are its lingerie and its ready-to-wear apparel. On the lingerie side, from highest price/consumer to lowest, the company has Honey Birdette with price points in the $100s, Playboy lingerie in the $50s, and Yandy in $20s. On the apparel side the company has, from highest price/consumer to lowest, its BigBunny brand in the $100s, Playboy Collaborations in the $70s, and Playboy Apparel in the $50s. This is a strategy that many of the best apparel brands, like Nike, execute to perfection. If Playboy can continue to execute on this strategic initiative, the apparel/lingerie offering will have years of profitable growth ahead.

PLBY saw some interesting trading and ownership activity in the stock this week. Some investors were out buying call options on PLBY with elevated volume and then a  couple days later Builders Union filed a 13G as a 5% holder.

This seems purely like a move to increase stake, no activist play here. Builders Union, like us, subscribes to the repositioning of the brand for the younger, global generation.  The fund apparently uses consumer preferences of the younger generation to drive investment decisions.  Quad4 is winning on the stock while the company has seen poor execution, but we think there is a lot of growth opportunity here and the increased stake by this holder is supportive of that opportunity.